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Nestle - outlook for sales improves, whilst margin gets trimmed

Half year sales of CHF45.6bn reflected 8.1% organic growth.

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Half year sales of CHF45.6bn reflected 8.1% organic growth. Volumes and pricing contributed 1.7% and 6.5% respectfully. Growth was broad-based across most geographies and categories.

Underlying operating profit rose 6.0% to CHF7.7bn, aided by higher sales as costs increases weighed on margins.

Full year organic sales are expected to grow 7-8%, up from 5%. Underlying operating margin is now expected around 17.0%, down from 17.0-17.5%.

The shares fell 1.6% following the announcement.

View the latest Nestlé share price and how to deal

Our view

With input costs on the rise, Nestlé's had to resort to price increases to keep things ticking along. That's contrary to the group's volume led strategy (more on that later) but no one's immune to the wider inflationary pressures so it's a necessary flex. The good news is that so far volumes are still managing to edge higher thanks to a strong range of products.

More broadly, the underlying performance has been very impressive. A global footprint and varied product base mean the group's been able to move with the market over the past couple of years. Exposure to pet care, health and at-home coffee products in particular helped in lockdown conditions. They're also exactly the kind of thing people buy over and over again in normal times.

We also admire the operating model, which focuses volume instead of price increases. That's helped deliver underlying sales growth of at least 2% for over 20 years. And, despite obvious challenges to the model, sales are expected to keep moving in the right direction over the medium-term.

Mounting pressures from inflation are starting to take their toll on margins that are trying their best to hold firm. For now, price hikes are pushing revenue high enough to offset lower margins. Though, there's a limit to how long that'll last.

Nestlé relies on a research & development spend of more than 1.5bn Swiss Francs (CHF) a year to provide fuel for volume growth. New varieties and formats of existing popular brands benefit from the much larger marketing and admin budgets, ensuring they're front and centre of consumers' minds. That in turn encourages reliable revenues. Extra sales boost profits, and profits can be paid out as dividends or reinvested in next year's products.

That virtuous cycle has seen the group increase the dividend every year for 29 years - although remember all dividends are variable and not guaranteed.

The group has been doing a bit of housekeeping recently, clearing out low potential brands and stocking up in growth areas such as The Bountiful Company's nutrition and supplements business. A higher growth portfolio can only be a good thing, and the group's been trimming its stake in L'Oréal which stood at 20.1% last we heard.

Nestlé's not a company likely to deliver dizzying levels of growth from here. It's more steady-eddie than stellar growth stock. However, Nestlé's resilience comes at a price, with a Price/Earnings ratio above the long-term average. That reflects the group's strengths, but also means there's pressure for sales to keep moving forwards.

Nestlé key facts

All ratios are sourced from Refinitiv. Please remember yields are variable and not a reliable indicator of future income. Keep in mind key figures shouldn't be looked at on their own - it's important to understand the big picture.

First Quarter Trading Update (organic)

North America posted sales of CHF12.1bn, reflecting growth of 9.6%. Growth was entirely down to higher prices, which contributed 9.8% as volumes fell 0.2%. The Zone saw continued broad-based market share gains, particularly in pet food, coffee and creamers as well as premium water. Underlying operating profit rose from CHF2.1bn to CHF2.3bn.

Europe saw sales growth of 7.1% to CHF9.3bn. Volumes rose 2.1% helped by a recovery in out-of-home channels (think hospitality) and price rises contributed 4.9%. The Zone continued to see market share gains, particularly in pet food, coffee and Infant Nutrition. Underlying operating profit fell from CHF1.7bn to CHF1.6bn as higher prices couldn't fully offset rising costs.

Sales grew 8.2% in Asia, Oceania and Africa, to CHF9.3bn. Pricing rose 6.1% and volumes 2.1%, with broad-based contributions from all geographies and categories. Underlying operating profit was broadly flat at CHF2.2bn as sales growth was offset by higher costs.

Broad-based contributions across geographies and categories helped Latin America post sales growth of 13.6%, to CHF5.7bn. There was volume growth of 4.2% and price increases of 9.4%. Underlying operating profit rose from CHF1.0bn to CHF1.2bn.

Greater China reported sales of CHF2.7bn, with growth of 2.3%. Whilst ongoing movement restrictions impacted trading, growth was supported by robust demand in e-commerce channels. Volumes grew 1.6%, with prices up 0.7%. Underlying operating profit rose from CHF352m to CHF400m.

Nespresso posted sales of CHF 3.2bn, with growth of 2.6% entirely down to pricing which contributed 4.2%. Nestlé Health Sciences saw sales grow 6.6% to CHF 3.2bn, this time volume growth was the main contributor, up 4.4%. The Orgain acquisition, as well as brands from The Bountiful Company, helped reported sales jump 57.2%.

Free cash flow decreased from CHF2.8bn to CHF1.5bn, reflecting a temporary increase in capital expenditure to meet strong demand.

Net debt increased to CHF48.5bn, up from CHF32.9bn at the start of the year. The increase largely reflected cash returns to shareholders.

This article is original Hargreaves Lansdown content, published by Hargreaves Lansdown. It was correct as at the date of publication, and our views may have changed since then. Unless otherwise stated estimates, including prospective yields, are a consensus of analyst forecasts provided by Refinitiv. These estimates are not a reliable indicator of future performance. Yields are variable and not guaranteed. Investments rise and fall in value so investors could make a loss.

This article is not advice or a recommendation to buy, sell or hold any investment. No view is given on the present or future value or price of any investment, and investors should form their own view on any proposed investment. This article has not been prepared in accordance with legal requirements designed to promote the independence of investment research and is considered a marketing communication. Non-independent research is not subject to FCA rules prohibiting dealing ahead of research, however HL has put controls in place (including dealing restrictions, physical and information barriers) to manage potential conflicts of interest presented by such dealing. Please see our full non-independent research disclosure for more information.

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Written by
Matt Britzman
Equity Analyst

Matt is an Equity Analyst on the share research team, providing up-to-date research and analysis on individual companies and wider sectors.

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Article history
Published: 28th July 2022